Introduction
The past decades have witnessed the transformation of the models of organization of production toward greater outsourcing of activities and increased geographical fragmentation. This trend has been based on the comparative advantage offered by the respective locations.Footnote 1 The new era of global production, which emerged after the Golden Sixties, led to the rise of global value chains (GVCs),Footnote 2 defined as “the series of stages in the production of a product or service for sale to consumers. Each stage adds value, and at least two stages are in different countries.”Footnote 3 A significant feature of this new model of production is the ability, for lead companies (i.e., companies at the apex of the value chain), “to control production over large distances without exercising ownership.”Footnote 4
The rise of value chains accelerated from the 1990s onward.Footnote 5 Products were no longer made at one or two locations but all over the world. This has allowed companiesFootnote 6 to reduce production costs significantly inter alia by sourcing from countries (host states) with less stringent regulatory frameworks in relation to human rights and environmental standards. Indeed, domestic regulatory frameworks are highly variable,Footnote 7 and host states can be unwilling to regulate the activities of companies on their territory for fear of discouraging foreign investors.Footnote 8 This has given rise to governance gaps creating the permissive environment for adverse human rights impacts to take place in various parts of the value chains.Footnote 9 Tragic examples of emblematic cases include the poor working conditions of workers in the Chinese factory producing iPhone and iPad parts, leading to many suicides amongst the workers;Footnote 10 the collapse of the Rana Plaza building in Bangladesh which took the lives of 1,134 workers of garment factories housed in the building that were supplying international brands;Footnote 11 the widespread use of child labor and issues of deforestation in cocoa farms in West Africa, which supply major food, beverage, and chocolate companies;Footnote 12 or the issues of forced labor and human trafficking of migrant workers on the Thai fishing boats, which supply international supermarkets.Footnote 13 More recently, the COVID-19 pandemic has shone a light on the difficulties resulting from unregulated GVCs. It has also raised questions on the human rights compatibility of business responses to the pandemic. For instance, mass cancellation of orders have led to millions of workers being laid off in the GVCs of international fashion brands,Footnote 14 and a number or large companies have invoked the force majeure clause in their contracts with suppliers, preventing payment for produced orders, thereby leaving their value chain workers with no wages.Footnote 15
Many such abuses have been documented by NGOs who have publicly called on companies to account for the human rights abuses in their value chains over the past few decades.Footnote 16 Protests against large, high-profile multinational companies have proliferated and heralded a wave of legal actions.Footnote 17 Protests and legal actions originally focused on human rights and labor rights issues, but have progressively evolved to include environmental issues, as awareness of the direct repercussions that they can have for the enjoyment of human rights has grown.Footnote 18 In an attempt to address their reputational risks, a growing number of companies started to adopt self-regulatory measures on a voluntary basis. In 1994, Bob Haas, then CEO of Levi Strauss, stated that: “In today's world a TV expose on working conditions can undo years of effort to build brand loyalty.”Footnote 19 Levi Strauss was one of the first companies to establish a code of conduct.Footnote 20 Many companies followed suit, which resulted in a proliferation of voluntary codes of conduct.Footnote 21 Self-regulation was also perceived as a means to avoid more stringent regulatory actions by governments.Footnote 22 However, these codes of conducts were quickly criticized for being inadequate answers to human rights issues.Footnote 23 As a next step, companies started to engage with new types of auditing and certification systems to address human rights and environmental concerns.Footnote 24 All these approaches relied on voluntary undertakings on the part of companies, meaning that no legal consequences resulted from noncompliance. At the international level, the choice of voluntary approaches to regulate the human rights responsibilities of companies was reinforced by the adoption of “soft law” instruments such as the UN Guiding Principles on Business and Human Rights (UNGPs). Soft law instruments do not create legally binding obligations and, as a result, noncompliance with soft law instruments does not normally give rise to legal consequences. They have been described as “as a transitional stage in the development of norms where their content is vague and their scope imprecise.”Footnote 25 The over-reliance on voluntary measures and soft law instruments have been increasingly criticized as being insufficient to foster positive change in corporate behavior.Footnote 26 Many studies have highlighted the correlation between the soft law character of instruments seeking to regulate business activities, and the poor implementation by companies of their human rights responsibilities in practice.Footnote 27
Simultaneously, the legal accountability of companies for adverse human rights impacts in their activities and GVCs has remained meagre, and access to effective remedies for victims of business-related human rights abuses largely inadequate.Footnote 28 In an attempt to bridge the resulting accountability gap,Footnote 29 various recent developments at the domestic, European, and international levels have sought to enhance corporate accountability in GVCs. This article analyses the incremental legal developments that increasingly recognize the existence of a legal duty (going beyond mere moral responsibility arising out of social expectations) for lead companies to respect human rights throughout their value chains. Our methodology rests on a comparative legal analysis on the basis of which we identify two recent, but significant, developments. The first development concerns the judicialization of the corporate responsibility to respect human rights in the case law on parent company liability in various jurisdictions, which, we argue, will have some implications for corporate liability in value chain cases as well. The second development refers to the recent legislative developments in various jurisdictions that increasingly tend to require (and not only encourage)Footnote 30 companies to undertake human rights due diligence as a means to identify, prevent, and address adverse human rights impacts in their GVCs.
This shift counters a long trend of neoliberal trade liberalization made possible by international economic and trade laws, which did not take social and/or environmental concerns into account. As SlobodianFootnote 31 argues, international trade law, and the establishment of international trade organizations and trade agreements, emerged from a desire to insulate global markets from sovereign states and political demands for state control on economic activity. This insulation allows markets to disregard political claims for social, environmental, or human rights protection. The key focus of international trade law is to remove any barriers to trade, first focusing on the reduction and elimination of tariffs and now increasingly removing technical (regulatory) barriers to trade. The shift from a “soft law” (i.e., nonbinding) corporate responsibility to respect human rights to a “hard law” (i.e., legally binding) duty to respect human rights constitutes an attempt to adjust for the negative consequences of unregulated global trade.
The judicialization of the corporate responsibility to respect human rights
The corporate responsibility to respect human rights was formally introduced in 2011 with the unanimous endorsement of the UNGPs by the UN Human Rights Council. Guiding Principle 11 of the UNGPs provides that “business enterprises should respect human rights.”Footnote 32 Commentary to Guiding Principle 11 clarifies that the corporate responsibility to respect human rights is not a legal norm but a social expectation; a “global standard of expected conduct for all business enterprises wherever they operate.”Footnote 33 Such responsibility to respect human rights requires that companies avoid causing or contributing to adverse human rights impacts through their own activities, and that they address such impacts when they occur. It also requires companies to seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products, or services by their business relationships.Footnote 34 Business relationships are understood to include relationships with business partners and entities in its value chain.Footnote 35 Under the UNGPs, the corporate responsibility to respect human rights therefore extends throughout the value chains, which marks a difference with the approach that had been predominant previously, in which companies were not seen as being accountable for the adverse human rights harms arising out of the activities of business partners in their GVCs. One of the most emblematic examples of that previous approach dates back to the 1970s when Nike was targeted by numerous protests and boycotts concerning labor practices in its supplier factories in South Korea, China, and Taiwan.Footnote 36 The company's initial response was to distance itself from what was happening within its “sweatshops.” Todd McKean, the then director of compliance of Nike reportedly stated in an interview in 2001: “Our initial attitude was, ‘Hey, we don't own the factories. We don't control what goes on there.”Footnote 37
From a legal perspective, this disassociation was permitted by the fact that, traditionally, the various entities within a corporate group and throughout the value chain were generally (and still are to a large extent) considered as entirely independent and autonomous, and governed by the laws of different jurisdictions based on their country of incorporation. This led to a fragmentation of legal responsibility,Footnote 38 whereby each entity within a value chain was accountable for the harms arising out of its own activities. However, since lead companies were legally construed as completely independent from their business partners, they were not considered to be accountable for the damage that resulted from the activities of the latter. However, such compartmentalization of the law ignored the interconnectedness that can exist between different entities within global value chains. In addition, it failed to take into consideration the significant differences that exist between the various types of value chains, and the varying degree of control that a lead company can exercise over its business partners.
Gereffi et al. (Reference Gereffi, Humphrey and Sturgeon2005) identify five types of value chains based on the level of power asymmetry between buyers and suppliers. These are from the lowest to the highest degree of power asymmetry:
– Markets: characterized by market linkages, and where the cost of switching to new partners are low for both parties.Footnote 39
– Modular value chains: in which suppliers typically make products or provide services to a customer's specifications, whilst retaining the full responsibility for process technology.Footnote 40 In this type of value chains, a buyer's need for direct monitoring and control is reduced.Footnote 41
– Relational value chains: in which interactions between buyers and sellers are characterised by mutual dependence, Footnote 42 even though the lead firm controls the highest valued activity in the chain, and thereby exercising control over the supplier.Footnote 43
– Captive value chains: in which “small suppliers are transactionally dependent on much larger buyers” and face significant switching costs making them “captive.” They are normally characterized by a high degree of monitoring and control by the lead firm.Footnote 44
– Hierarchy: characterised by vertical integration where companies acquire a company operating in the production process of the same industry.Footnote 45
In the case of hierarchy and captive value chains, one company (often a large multinational enterprise) has significant power and control over its business partners. In a relational or modular or market type of value chains, the power relations are more balanced.
The growing recognition of the power of influence of lead companies over their suppliers in certain types of value chains has triggered certain dynamics that aim to “discipline” large companies with regard to their adverse human rights impacts in their GVCs. This is the case in relation to the increasing use of judicial mechanisms to hold lead companies accountable in the home state jurisdiction.Footnote 46 In this respect, we analyse the progressive judicialization of the corporate responsibility to respect human rights in the case law on parent company liability, which increasingly acknowledges the existence of a duty of care on parent companies in relation to the harms arising out of the activities of their subsidiaries, and which, we argue, is highly likely to have some repercussions for lead companies in GVCs.Footnote 47
The emergence of a duty of care of parent companies in case law
In recent years, a number of cases have started to emerge that seek to establish the liability of parent companies for the human rights harms arising out of the activities of their subsidiaries. The evolution of the case law has been incremental and has been marked by a “profound change emerging in the principles governing these situations.”Footnote 48 This change has taken place through a progressive defragmentation of the liability of companies within a corporate group. Under the company law principle of separate legal personality, parent companies and subsidiaries are considered as separate legal persons, each individually responsible for their own activities. As a result, a parent company will not normally be liable for the harms arising out of the activities of its subsidiary. As Turner explains:Footnote 49
[C]ompanies have a “separate legal personality” to that of their owners or those that are involved in running them. This characteristic is endowed upon a business at the moment that it becomes incorporated. In practice this means that companies can enter into contracts in their own name, employ people in their own right, and continue to exist after the death of their founders and owners, and it also means that a company itself will assume ownership of the assets and liabilities of a business. This is helpful in facilitating investment and commerce. However, what it also means is that when a parent company sets up a subsidiary in another country (inevitably with its own “separate legal personality”), it is not (except in certain highly specific circumstances) directly liable for the debts or liabilities of that subsidiary.
However, recently, the case law has started to recognize that a parent company may be accountable for its own acts or omissions in relation to the harms arising out of the activities of its subsidiaries. In particular, English and Dutch case law have recognized that parent companies may, in certain circumstances, owe a duty of care to those affected by the activities of a subsidiary.Footnote 50 A duty of care can be described as referring to “the circumstances and relationships giving rise to an obligation upon a defendant to take proper care to avoid causing some form of foreseeable harm to the claimant in all the circumstances of the case in question.”Footnote 51 Breach of that duty of care is conducive of liability. Leader outlines two approaches that have been used in English case law to determine the existence of a duty owed by a parent company to take proper care to avoid causing foreseeable harm to the employees of its subsidiary and the local communities affected by the activities of the latter.Footnote 52 In the first approach—“the classic approach”—the parent company can be liable for the damage arising out of the activities of its subsidiary because of the high degree of control exercised by the parent company over the subsidiary's corporate decisions.Footnote 53 Leader notes that “in such a situation the subsidiary has in effect little to no discretion in making decisions.”Footnote 54 However, in practice, in cases where this approach has been used, courts have often concluded that the degree of control was not sufficient, in the circumstances, to trigger the liability of the parent company. An illustration of this can be found in the case of Okpabi v Royal Dutch Shell Footnote 55 which concerned the civil proceedings filed in the United Kingdom by 42,500 Nigerian residents against the parent company (Royal Dutch Shell Plc [RDC]) and its Nigerian subsidiary (the Shell Petroleum Company of Nigeria Limited [SPDC]) in relation to oil leaks from pipelines and associated infrastructures operated by SPDC, which, they claimed, affected their lives, health, and livelihoods as well as the local environment. The English Court of Appeal found that the claimants had not demonstrated a sufficient degree of control by the parent company over the operations of the Nigerian subsidiary to give rise to a duty of care. Another example can be found in the case of AAA & Others v Unilever PLC and Unilever Tea Kenya Limited,Footnote 56 which concerned the civil proceedings brought by a group of Kenyan residents against the parent company (Unilever) and its Kenyan subsidiary (Unilever Tea Kenya Limited [UTKL]) in relation to the ethnical violence suffered by workers and local residents of tea plantations operated by UTKL following the 2007 presidential election in Kenya, when they were targeted by mobs that came onto the tea plantations and attacked them. In finding that the parent company was not subject to a duty of care, the English Court of Appeal highlighted the substantial autonomy that the Kenyan subsidiary enjoyed in relation to the safety of its employees.Footnote 57
In the second approach identified by Leader—“the new approach”—what is relevant is the existence of a “special relationship” between the two entities, which creates the expectations that control should be exercised by the former over the activities of the latter.Footnote 58 This entails that, under certain circumstances, the parent company may be liable “for its failure to take measures that could have helped avoid the damage.”Footnote 59 This approach has been more conducive to finding that a parent company may owe a duty of care to the persons affected by the activities of its subsidiary. An illustration of this can be found in the seminal case of Chandler v Cape Plc,Footnote 60 which concerned the civil claim filed by a former employee of the parent company's (domestic) subsidiary who had developed a chronic lung disease as a result of exposure to asbestos during the course of his employment.Footnote 61 The court affirmed that the parent company owed a direct duty of care to the employees of its subsidiary.Footnote 62 This case is of particular importance as it was the first English case (and only so far) that resulted in finding a parent company liable for the harms caused by its subsidiary.
The varying approaches and outcomes of the above-mentioned case law underlines the difficulties for claimants to prove the relevant control de facto exercised, or which should have been exercised, by the parent company over its subsidiary.Footnote 63 This is exacerbated by the difficulties often encountered by claimants in corporate human rights cases in gaining access to the information required to substantiate their claim.Footnote 64
In an attempt to circumvent these difficulties, claimants have increasingly relied on the public commitments and the group-wide policies devised by parent companies. Their argument being that such commitments and policies create legitimate expectations in terms of the degree of supervision and control that should have been exercised by the parent company over the activities of its subsidiary.Footnote 65 On this basis, the UK Supreme Court has recently confirmed in its ruling on the Vedanta caseFootnote 66 that a parent company may, in certain circumstances, be liable for the harms caused by its subsidiaries. This case concerned civil proceedings brought in English courts by 1,826 Zambian citizens against the UK-domiciled company Vedanta Resources Plc (Vedanta) and its Zambian subsidiary (Kongola Copper Mines, Ltd [KCM]) in relation to the alleged toxic emissions from a copper mine operated by the subsidiary in Zambia, and resulting damage suffered by the claimants. In a unanimous decision delivered by Lord Briggs on 10 April 2019, the UK Supreme Court allowed the complaint to proceed in English courts. Although the UK Supreme Court formally ruled on the issue of jurisdiction only,Footnote 67 it made a number of critical assertions on the issue of the duty of care owed by parent companies vis-à-vis local communities adversely affected by the operations of its subsidiary. In particular, the court affirmed, inter alia, that a parent company may incur a duty of care to third parties, if, as part of its group-wide policies, it exercised a certain degree of supervision and control over the activities of its subsidiary or if it held itself out to exercise it in published materials, even if it did not actually do this in practice.Footnote 68 It results from this decision that group-wide policies and public commitments are a decisive factor in determining the degree of supervision that should have been exercised, based on the legitimate expectations created by such materials.Footnote 69
Similarly, in the case against Shell in the Netherlands,Footnote 70 which was brought by a group of Nigerian residents (a different group from the one who brought the case in the United Kingdom) against the parent company and its Nigerian subsidiary in relation to the oil spills arising out of the activities of its subsidiary in the Niger Delta and resulting human rights and environmental damage,Footnote 71 the Court of Appeal of the Hague also affirmed that a parent company may be liable for damages resulting from acts or omissions of a subsidiary. The Dutch Court of Appeal allowed the claim to proceed to trial in the Netherlands on the basis that “it cannot be ruled out from the outset that the parent company may be expected to take an interest in preventing spills (or in other words, that there is a duty of care […]).”Footnote 72 The Dutch Court of Appeal suggested that the group-wide policies adopted by the parent company were a key element in establishing the degree of control and supervision that should have been exercised by the parent company over the activities of its subsidiary.Footnote 73
In recent years, various cases have sought to extend the duty of care of a parent company to lead companies in value chains on similar grounds. Although none of the value chain liability cases have so far been successful in establishing the liability of lead companies, we argue that the evolution of parent company liability cases is very likely to have implications in value chains settings as will be shown in the next section.
Toward a duty of care for lead companies in global value chains?
As civil proceedings against lead companies for the harms arising out of the activities of their business partners have been multiplying over the past few years, a number of home state courts have shown signs of increased willingness to assume jurisdiction over such cases. The degree of control de facto exercised, or that should have been exercised by lead companies, over the activities of their business partners is becoming increasingly central in the discussions surrounding their potential liability for the adverse human rights impacts connected to their business partners.Footnote 74 In particular, the central question is whether lead companies owe a duty of care to the workers of their business partners and the local communities affected by their activities. Group-wide policies and public commitments can play an important role in answering this question.
In the United States, civil proceedings were filed against US company Wal-Mart by the employees of its foreign suppliers, on the basis of the working conditions in their employers' factories located in countries including China, Bangladesh, Indonesia, Swaziland, and Nicaragua. The claimants relied primarily on a code of conduct (“Standards for Suppliers”) that Wal-Mart incorporated into its supply contracts with foreign suppliers, requiring them to “adhere to local laws and local industry standards regarding minimum working conditions like pay, hours, forced labour, child labour and discrimination.”Footnote 75 The claimants argued, inter alia, that Wal-Mart had a duty of care to monitor its suppliers' compliance with the Standards and to protect the labor rights of its suppliers' employees.Footnote 76 They also sustained that “the short deadlines and low prices in Wal-Mart's supply contracts force suppliers to violate the Standards in order to satisfy the terms of the contracts.”Footnote 77 The Court of Appeals for the Ninth Circuit rejected their claims on the basis, inter alia, that Wal-Mart could not be held liable as the claimants’ joint employer under the facts alleged as “Wal-Mart exercised minimal or no control over the day-to-day work of Plaintiffs in the suppliers’ foreign factories.”Footnote 78 The court found, as a result, that it did not owe the claimant a duty of care to ensure its suppliers' compliance with the Standards that it had set and to protect the working conditions of its suppliers’ workers. This, however, suggests, a contrario, that such a duty of care could have been found had the lead company (Wal-Mart) exercised enough control and supervision over the activities of its suppliers. The approach adopted by the court is therefore similar to the “classic approach” used in parent liability cases according to which the existence of a duty of care is linked to the degree of control and supervision exercised by the parent company over the conduct of its subsidiary. By analogy, one might argue that, in certain circumstances, a lead company could be found liable in those types of value chains that are characterized by a high degree of monitoring and control by the lead firm. This is notably the case of captive value chains in which small suppliers are deeply dependent on larger, dominant companies,Footnote 79 which (1) exercise significant control or influence over their suppliers, and their mode of operation entailing the latter have in effect little discretion in making decisions, and (2) make it difficult for suppliers to switch to other companies.
In Canada, legal proceedings were filed by garment factory workers and relatives of victims of the Rana Plaza building collapse against Canadian retailer Loblaws, which purchased clothes from a manufacturer whose factory was in the Rana Plaza building.Footnote 80 The claimants argued, inter alia, that Loblaws owed them a duty of care to protect them from injury and to warn them of the dangers of the building resulting from the poor health and safety conditions. The court found that the claimants' class action could not be certified since, in particular, the relationship between Loblaws and foreign garment workers was not sufficiently close to give rise to a duty of care.Footnote 81 The decision suggests, in turn, that had the relationship been sufficiently close, such a duty of care could have been found to exist. The approach adopted by the Canadian court corresponds to the “new approach” used in parent liability cases that relies on the existence of a special relationship between the two entities, creating the expectation that control should be exercised by the parent company over the subsidiary. As discussed above, public commitments and the group-wide policies devised by the parent company play a central role in the establishment of the duty of care insofar as they create legitimate expectations in terms of the degree of supervision and control that should have been exercised by the parent company over the activities of its subsidiary. Applied to value chain settings, this would entail that the liability of the lead company might be found to exist where different entities are “meticulously coordinated and controlled” within the value chain as a whole by the lead company.Footnote 82 This is particularly the case in captive value chains in which the “buyer ensures that the producers meet delivery dates, quality standards, design specifications and so on.”Footnote 83 As a result, the lead company controls “many of the aspects of production carried out by the producer.” Footnote 84 The fact that many lead companies across sectors set themselves out in their public representations as exercising tight control “over the timing and quality of the goods and services they produce and which they also source from outside the company”Footnote 85 would be one element that would contribute to creating the expectation that control should be exercised by the lead company over its business partner.
In Germany, civil proceedings were filed against German retailer KiK by four Pakistani victims and relatives of victims of a fire that occurred in the garment factory of one of its suppliers (Ali Enterprises) in Pakistan, which took the lives of 262 workers and left dozens more injured.Footnote 86 The claimants sought to establish the liability of KiK as the main buyer of the (it purchased 75 percent of the factory's output)Footnote 87 for failure to provide a healthy and safe working environment and prevent the harm suffered by the victims.Footnote 88 An architectural analysis carried out after the tragedy revealed that inadequate fire safety measures, such as the lack of stairs, emergency exits, fire extinguishers, and fire alarms in the factory, contributed to the high number of victims.Footnote 89 The claimants sustained that KiK “had controlled factory conditions and assumed responsibility for safety management,”Footnote 90 and thus had a duty of care to ensure a healthy and safe working environment.Footnote 91 In an attempt to demonstrate the control exercised by KiK over its supplier, the claimants highlighted in particular that KiK had established its own suppliers' Code of Conduct requiring compliance with certain standards in order to ensure safe working conditions.Footnote 92 In addition, KiK had systems in place to monitor and ensure compliance with its own Code of Conduct, which included the appointment of auditors to inspect the factory, the issuing of corrective actions plans, and the possibility to terminate the business relationship for failure to comply with the Code.Footnote 93 Moreover, KiK held itself out to exercising control over the working conditions in its value chain in its public representations.Footnote 94 In its defense, KiK sustained, inter alia, that the relationship it had with its supplier was not a sufficiently close one and that it was not aware of the safety defects in the factory, as compliance with the safety standards was verified by an independent third party.Footnote 95 In addition, the defendant argued that the codes of conduct between KiK and its suppliers were only voluntary and not enforceable.Footnote 96 The questions of the control exercised by KiK over its suppliers, and its potential resulting liability, were never fully explored by the German court since the case did not reach the merits stage. Indeed, after an initial decision from the Regional Court of Dortmund in 2016, in which the German court accepted jurisdiction over the case and granted legal aid to the claimants, the claim was finally rejected on 10 January 2019 on the basis that it was time-barred.Footnote 97
The lack of decisions, to date, recognizing the liability of lead companies for the human rights harms caused by their suppliers highlights the many barriers (both procedural and legal) faced by claimants in cases concerning corporate-related human rights and environmental abuses.Footnote 98 Nevertheless, it is argued that the evolutions of the case law on parent liability detailed in the previous section are highly likely be to extended beyond the corporate group. Indications of the future judicialization of the corporate responsibility to respect human rights in relation to lead companies (as well as parent companies) have recently emerged from certain cases, such as the one of the Canadian Supreme Court in Nevsun Resources Ltd. v Araya. Footnote 99 This case involved the civil proceedings brought by three Eritrean citizens in Canada against Canadian company Nevsun Resources Ltd (Nevsun) who claimed that they were subjected to forced labor and to violent, cruel, inhuman, and degrading treatment at the hands of the Eritrean police forces, in a mine in Eritrea which was owned by Nevsun but operated by a subcontractor of its Eritrean subsidiary. The Canadian Supreme Court affirmed that the claim could proceed to trial, thereby impliedly acknowledging that Nevsun could be held civilly liable for the human rights harms linked to the activities of subcontractors.
In value chain settings, the degree of control and supervision exercised by a lead companies at the apex of the value chains can sometimes be comparable to the one exercised by parent companies over their subsidiaries. As a result, it is argued that the liability of lead companies may be triggered on the same basis—i.e., control and direction exercised de facto, or that should have been exercised, over the relevant activities—in those types of value chains that are characterized by a high level of power and control exercised by a lead company over its business partner, such as hierarchy and captive value chains. This would implicate to distinguish between the various types of value chains outlined above so that liability would not automatically fall on buyers in relation to all the adverse human rights harms arising out of the activities of each and every entity in their GVCs, but would instead be triggered in those types of value chains where the lead company has significant power, de facto control, or economic control over its business partners.
In parallel to these case law developments, legislative initiatives have been multiplying at the domestic level in the past five years, fueled by a growing momentumFootnote 100 for the recognition of a corporate duty—going beyond a mere moral responsibility arising out of social expectations—to respect human rights in global supply or value chains.Footnote 101 This has translated into legislation on mandatory human rights due diligence, acknowledging the existence of a duty of care of lead companies vis-à-vis the workers and local communities of their business partners, and requiring them to put in place processes to avoid causing them harm, and to provide remedy for the harms when they have occurred.
The emergence of corporate due diligence obligations
The legal landscape has evolved significantly over the past decades, as attempts to regulate the adverse human rights and environmental impacts arising out of business activities have intensified.Footnote 102 At the international level, no binding international norm currently exists to specifically regulate companies with regards to human rights violations that occur in their GVCs. Negotiations on a Binding UN Treaty on Business and Human Rights are currently ongoing,Footnote 103 however, previous attempts to elaborate a legally binding instrument to regulate corporate behavior failed in the past. In 2003, the UN Sub-Commission on Human Rights produced a set of Norms (the UN Norms) which sought to impose human rights obligations on companies, by providing that:
Within their respective spheres of activity and influence, transnational corporations and other business enterprises have the obligation to promote, secure the fulfillment of, respect, ensure respect of and protect human rights recognized in international as well as national law, including the rights and interests of indigenous peoples and other vulnerable groups.Footnote 104
The UN Norms were rejected by the Commission on Human Rights on the grounds that human rights instruments, which are addressed to states, did not impose binding obligations on companies.Footnote 105 Against this backdrop, a different path was pursued at the international level seeking to regulate companies through soft law instruments. In 2008, the Special Representative of the Secretary-General (SRSG) on the issue of human rights and translational corporations and other business enterprises, John Ruggie, presented the “Protect, Respect, Remedy” Framework,Footnote 106 which rested on differentiated but complementary responsibilities with regards to adverse human rights impacts resulting from business activities.Footnote 107 States bear the primary responsibility to protect human rights through a legal obligation grounded in international human rights law, and companies have a responsibility to respect human rights grounded in social expectations, which forms part of their “social licence to operate.”Footnote 108
The UNGPs were subsequently developed, in order to operationalize the Framework.Footnote 109 They introduced the concept of “human rights due diligence,” which is the means through which companies can fulfill their responsibility to respect human rights. It describes an ongoing process through which companies can “identify, prevent, mitigate and account for” the actual and potential adverse human rights impacts that they may cause or contribute to through their own activities, or which may be directly linked to their operations, products, or services by their business relationships.Footnote 110
The UNGPs have been extremely influential, and the concept of human rights due diligence is reflected in a number of international and regional standards and instruments,Footnote 111 such as the 2011-revised OECD guidelines for Multinational Enterprises,Footnote 112 and the 2017-revised ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy.Footnote 113 However, the soft law character of all of these instruments at the international level means that they do not create legally binding obligations for companies.Footnote 114 As a result, the decision on whether and how to respect human rights and to devise and implement human rights policies and practices, remains at the companies' discretion. In practice, many studies have highlighted the limitations of the over-reliance on soft law and voluntary approaches in terms of companies' implementations of their human rights responsibilities.Footnote 115
Against this backdrop, a progressive hardening of the soft law is taking place at the domestic level as an increasing number of jurisdictions are implementing the UNGPs' human rights due diligence expectations.Footnote 116 In particular, there is a now a broad spectrum of domestic legislations or legislative initiatives encouraging or requiring companies to undertake due diligence in their operations and throughout their supply or value chains. In a first step, a series of regulations have been adopted so as to encourage companies to undertake human rights due diligence through mandatory reporting, requiring them to disclose their efforts to eradicate certain human rights issues in their global supply chains.Footnote 117 However, the concrete impact that reporting regulations have had on corporate behavior and practices has remained extremely limited.Footnote 118 More recently, the evolution of the legal landscape has been marked by the emergence of mandatory human rights due diligence regulations, creating a legal duty for corporations to exercise due diligence in their operations and throughout their supply chains.
The rise of mandatory human rights due diligence regulations
Two examples of mandatory human rights due diligence legislation have been adopted so far in Europe at the domestic level. First, in the Netherlands, the Dutch Child Labour Due Diligence Act adopted on 14 May 2019Footnote 119 requires companies providing goods and services to Dutch end-users to take positive steps in order to identify and address the risks of child labor in their supply chains. In particular, companies are required to investigate whether there is a reasonable suspicion that the goods or services they provide have been produced using child labor, and, should that be the case, put in place an action plan in order to address it.Footnote 120 They must also issue a statement on the human rights due diligence that they exercised.Footnote 121 The legal duty on lead company to undertake human rights due diligence extends to the entire supply chain, and the law does not include any limitations based on the control exercised by the lead company over the relevant entity. Although failure to comply with the due diligence obligations may be sanctioned by a public authority, the law does not provide for a civil liability mechanism in case of harms. This is an importance difference with the second example of mandatory human rights due diligence legislation, which is the French Duty of Vigilance Law.
Second, the French Duty of Vigilance Law, adopted in 2017, imposes a general legal duty on companies to undertake human rights due diligence across human rights and environmental issues. It was the first legislation of this type to be adopted worldwide.Footnote 122 It requires large French companiesFootnote 123 not only to report on the steps that they are taking to identify and address their adverse human rights and environmental impacts but also to undertake substantive human rights due diligence in order to identify, prevent, and address human rights and environmental harms resulting from their own activities and their supply chains. The legal duty of vigilance created by the legislation entails a threefold obligation to put in place, effectively implement, and publicly disclose a vigilance plan (plan de vigilance). The legal duty covers companies' own operations as well as “the companies under their control,” or “the activities of their subcontractors and suppliers with whom they have an established business relationship.”Footnote 124 The concept of “controlled companies” is defined by reference to article L. 233-16 II of the French Commercial Code as requiring “exclusive control” in the sense that it “enables the company to have decision-making power, in particular over the financial and operational policies of another entity.”Footnote 125 French law defines an “established commercial relationship” as “a stable, regular commercial relationship, taking place with or without contract, with a certain volume of business, and under a reasonable expectation that the relationship will last.”Footnote 126 It is narrower that the concept of business relationships used by the UNGPs insofar as it excludes ad hoc relationships. However, the French Duty of Vigilance law does not distinguish between the various types of supply chains and the varying degrees of control exercised by the lead company over its “established business relationships.” The legal duty of vigilance is coupled with a civil liability regime based on the general tort of negligence in case the company's failure to carry out appropriate human rights due diligence results in a damage.Footnote 127
The French law has been greatly influential and other similar legislative initiatives have been under consideration across Europe and beyond. In Switzerland, a Swiss Popular Initiative seeking to require Swiss-based business enterprises to carry out “appropriate due diligence” in relation to their human rights and environmental impacts emerged as the French law was still under discussion.Footnote 128 If adopted, it would create a legally binding duty on companies to respect internationally recognized human rights and international environmental standards and “to ensure that human rights and environmental standards are also respected by companies under their control.”Footnote 129 The Swiss Initiative specifies that: “whether a company controls another is to be determined according to the factual circumstances. Control may also result through the exercise of power in a business relationship.”Footnote 130 As a result, the duty to respect human rights would not cover all business relationships within the supply chains but it would be limited to the entities in the supply chain over which the company exercises sufficient control, which includes the economic control that may be exercised by a lead company over its supplier.Footnote 131 This would be the case in captive value chains. In order to fulfill their legal duty to respect international human rights and environmental standards, companies would be required to carry out due diligence in order to “identify real and potential impacts on internationally recognized human rights and the environment; take appropriate measures to prevent the violation of internationally recognized human rights and international environmental standards, cease existing violations, and account for the actions taken.”Footnote 132 The Swiss Responsible Business Initiative also contains a specific liability provision according to which Swiss companies are “liable for the damages caused by the companies under their control.”Footnote 133 In addition the text of the initiative provides for a human rights due diligence defense whereby companies are not liable “if they can prove that they took all due care […] to avoid the loss or damage, or that the damage would have occurred even if all due care had been taken.”Footnote 134 The Swiss Responsible Business Initiative will be subject to a popular vote on 29 November 2020. If it is approved by the Swiss citizens, the Swiss Responsible Business Initiative will enter into force, alternatively, it will be the parliamentary counter-proposal adopted in June 2020 which enters into force.
Various developments and legislative initiatives are being discussed in several other countries.Footnote 135 In Denmark, a parliamentary motion was put forward by three political parties calling on the government to introduce a bill on mandatory human rights due diligence for all large companies as well as companies in high-risk sectors.Footnote 136 In Italy, the government committed under its National Action Plan to assess existing laws and legislative reform introducing human rights due diligence,Footnote 137 and in Finland, the government committed to conduct a study with the goal of adopting a mandatory human rights due diligence legislation.Footnote 138 In the United Kingdom, a coalition of civil society organizations have prepared a proposal for a corporate duty to prevent adverse human rights and environmental impacts based on a 2017 recommendation from the UK Joint Committee on Human Rights for a legislation modelled on the UK Bribery Act 2010.Footnote 139 In Germany, the Key Points for a draft Due Diligence Act were recently leaked. The draft Act seeks to impose corporate due diligence obligations on German-based companies with more than 500 employees throughout their value chains.Footnote 140 In Norway, a draft Act relating to transparency in supply chains was also released in November 2019.Footnote 141
At the European level, various instruments have also been adopted that introduce certain human rights due diligence obligations, but these are so far limited to certain sectors or commodities.Footnote 142 In addition, the EU Non-Financial Reporting Directive requires large public-interest companies to disclose information on the policy they implement in relation to, inter alia, environmental, social, and employee matters and respect for human rights.Footnote 143 However, this remains a reporting requirement and eligible companies are not required to actually exercise substantive human rights due diligence. Nonetheless, the momentum for an EU-level legislation on human rights and environmental due diligence legislation is getting stronger.Footnote 144 In 2019, the European Commission (DG Justice and Consumers) commissioned a study on due diligence requirements through the supply chain.Footnote 145 According to the study, a large majority of stakeholders viewed the introduction of an EU-level regulation on mandatory human rights and environmental due diligence as beneficial for business as well as other stakeholders.Footnote 146 On 29 April 2020, on the basis of the findings of the study, European Commissioner for Justice Didier Reyders announced the commitment of the European Commission to introduce a legislative initiative on mandatory human rights and environmental due diligence in 2021 as part of the EU's COVID-19 recovery package.Footnote 147
At the international level, evolutions toward the progressive recognition of a states' duty to require business companies to undertake human rights due diligence in their own activities and in their value chains are also taking place. The open-ended Intergovernmental Working Group (OEIWG), which was established in 2014 with a mandate to “elaborate an international legally binding instrument to regulate, in international human rights law, the activities of transnational corporations and other business enterprises,”Footnote 148 released the first official draft (the “Zero Draft”) of the Treaty on 16 July 2018,Footnote 149 a First Revised Draft on 16 July 2019,Footnote 150 and a Second Revised Draft on 6 August 2020.Footnote 151 Article 6(1) of the Second Revised Draft provides that “State Parties shall regulate effectively the activities of all business enterprises domiciled within their territory or jurisdiction, including those of a transnational character.” It also clarifies that, for this purpose, states shall take “all necessary legal and policy measures” to ensure that such business enterprises respect all internationally recognized human rights and prevent and mitigate human rights abuses throughout their operations.Footnote 152 Article 6(2) further specifies that “States Parties shall require business enterprises to undertake human rights due diligence proportionate to their size, risk of severe human rights impacts and the nature and context of their operations” [italics added]. Human rights due diligence is defined in the Second Revised Draft as the means through which companies can identify, assess, prevent, and mitigate actual and potential adverse human rights abuses that may arise from their own business activities, or from their business relationships, as well as monitor the effectiveness of their processes and communicate externally about their responses, in line with the UNGPs. The Second Revised Draft also provides for a legal liability provision in case human rights harms occur in GVCs where the lead companies either (1) “legally or factually controls or supervises” their business partner or the relevant activity that caused or contributed to the human rights harm, or (2) “should have foreseen risks of human rights abuses in the conduct of their business relationships, but failed to put adequate measures to prevent the abuse.”Footnote 153
As illustrated throughout this section, the emerging legislation and legislative proposals are gravitating toward the recognition of a legally binding duty on lead companies to respect human rights, which can and should be fulfilled through the exercise human rights due diligence in order to prevent, mitigate, and address the adverse human rights and environmental impacts arising out of their own activities as well as from the entities of their business partners (or at least some of them) in their global supply or value chains. Although legislation and legislative initiatives do not normally distinguish between the different types of value chains, a number of them contain criteria of control which would effectively limit their application to captive value chains.
Conclusion
In 2011, when the UN Human Rights council endorsed the UNGPs, critics affirmed that: “the council endorsed the status quo: a world where companies are encouraged but not obliged to respect human rights.”Footnote 154 Indeed, the UNGPs clarify that the corporate responsibility to respect human rights set out in the UNGPs is not a legal norm but a global standard of expected conduct that forms part of the companies' social licence to operate.Footnote 155
In recent years, various case law and legislative developments at the domestic, European, and international levels seeking to enhance corporate accountability have contributed to a progressive hardening of a soft law, turning the corporate responsibility to respect human rights into a legal duty.
The first series of development explored in this article concern the judicialization of the corporate responsibility to respect human rights in the case law on parent company liability in various jurisdictions. Indeed, in the case law concerning the corporate group itself, there has been a progressive recognition of the liability of parent companies in relations to the harms caused by their subsidiaries. In particular, a duty of care owed by parent companies to the employees of their subsidiaries and local communities affected by the activities of the latter has emerged over the past few years, on the basis of the control and direction exercised de facto, or that should have been exercised, by the parent company over the relevant activities of the subsidiary. In this respect, group-wide policies and public commitments have played a crucial role in determining the degree of supervision exercised de facto by a parent company but also at the degree of control that should have been exercised, based on the legitimate expectations created by such materials. This trend was recently reaffirmed by the UK Supreme Court in the Vedanta case. We have argued that it is highly likely to have some implications in relation to certain types of value chains so as to trigger the liability of lead companies for the entities over which they exercise control and supervision. This is particularly the case with captive value chains in which the degree of control and supervision exercised by lead companies is not dissimilar to the one exercised by parent companies over their subsidiaries.
In parallel, the legal landscape has changed dramatically in recent years. Mandatory reporting regulations have started to emerge since the 2010s to encourage companies to undertake human rights due diligence. More recently, mandatory human rights due diligence legislations have started to gain traction, requiring lead companies to undertake human rights due diligence in order to identify, prevent, and address the adverse human rights in their own activities and in their global value chains. Such regulation of lead companies by their home states has been welcomed as a way to close the regulatory gap.Footnote 156 Although in the UNGPs, the human rights due diligence requirements cover all of the entities within all types of value chains, in regulations seeking to implement it, it is not automatically accompanied by legal liability when harms do occur. Rather, legal liability in regulations tend to be limited to entities within the supply or value chains over which the lead company exercises effective control (either legal, factual, or economic) and supervision. Accordingly, from a legal perspective, it is becoming more difficult for lead companies in captive value chains to disassociate themselves from the adverse human rights impacts arising out of the activities of controlled business partners in their global value chains.
These two (case law and legislative) developments are not taking place in silos. In fact, as detailed in this paper, the concepts of human rights due diligence and duty of care are two sides of the same coin since human rights due diligence is the means through which companies can discharge their duty of care, and thereby fulfill their (emerging) corporate duty to respect human rights by avoiding causing harms to the workers of local communities affected by the activities of their subsidiaries or business partners, and providing remedy for the harms when they have occurred. Ultimately, the adequate exercise of human rights due diligence (i.e., in line with the UNGPS requirements) may well constitute the strongest defense for a company accused of having breached their duty of care vis-à-vis the workers of a business partner or the local communities adversely affected by the activities of the latter.
